DDTC Issues Interim Final Rule Significantly Amending ITAR "Brokering" Provisions
Today DDTC published an interim final rule in the Federal Register that makes significant changes to the current definition of “brokering” and related brokering activities in the International Traffic in Arms Regulations ("ITAR").
These revisions to the ITAR's brokering provisions have been eagerly anticipated by the defense trade community since the DDTC’s December 19, 2011 proposed amendment to the brokering provisions were widely criticized. In formulating the revised brokering provisions published today, DDTC took into account many of the public comments, as well as the input of the Defense Trade Advisory Group (DTAG).
This interim final rule, which will become effective on October 25, 2013, dramatically revises the definition of a “broker” in section 129.2(a) of the ITAR. The new definition of a “broker” is as follows:
(a) Broker means any person (see Sec. 120.14 of this subchapter) described below who engages in the business of brokering activities:
(1) Any U.S. person (see Sec. 120.15 of this subchapter) wherever located;
(2) Any foreign person (see Sec. 120.16 of this subchapter) located in the United States; or (3) Any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person.
The revised definition of “brokering activities” in section 129.2(b) of the ITAR reads as follows:
(b) Brokering activities means any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin.
(1) Such action includes, but is not limited to:
(i) Financing, insuring, transporting, or freight forwarding defense articles and defense services; or
(ii) Soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service.
These changes dramatically narrow the current ITAR definition, which provides that a “broker” is “ any person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee, commission, or other consideration.”
It has been DDTC’s long-standing policy and practice to treat non-U.S. persons as a broker if the non-U.S. person acted as an agent in negotiating a contract for the delivery of U.S. defense articles or defense services, even if they had no other U.S. contacts and were not physically located in the U.S.
In this interim final rule, DDTC stated that it has: “clarified that foreign persons that are required to register as brokers are those that are in the United States and those foreign persons outside the United States that are owned/controlled by a U.S. person.”
DDTC also stated that it has “removed from the definition of ‘brokering activities’ the activities of any foreign person located outside the United States acting on behalf of a U.S. person.”
The interim final rule also addresses the types of activities that are not brokering activities, including an important issue that was raised in the December 19, 2011 proposed brokering rule regarding legal advice provided by attorneys. Specifically, the interim final rule makes clear that "activities by an attorney that do not extend beyond the provision of legal advice to clients'' is not a brokering activity and that "legal advice" includes the provision of export compliance advice by an attorney to a client.
As a result of this change, DDTC has estimated that “approximately 1,300 of the currently-registered brokers will not need to maintain registration following implementation of this rule, and that approximately 300 brokers will be eligible to consolidate into their manufacturer/exporter registration and no longer be required to pay a broker registration fee.”
This interim final rule will become effective on October 25, 2013 and DDTC will accept public comments on the interim final rule until October 10, 2013. While DDTC will eventually publish a final brokering rule, the basic concepts and definitions included in this interim final rule are not likely to change.